CalPERS earnings bounce back

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The huge investment funds that feed the California Public Employees' Retirement System, or CalPERS, gained 13.3 percent in the 2012 calendar year, a rebound after tiny net returns reported for the fiscal year ending June 30, officials announced this week.

Though CalPERS released earnings for the 2012 calendar year, the system actually uses the fiscal year ending June 30 to calculate investment returns and how much taxpayers must contribute to cover public employees' retirement costs. In the fiscal year ending June 30, the system earned 0.14 percent on its investments, far short of the 7.5 percent CalPERS assumed it would gain.

But in the first six months of the current fiscal year, things were looking up.

Driven largely by strong returns on global stocks and real assets, the pension fund gained 7.1 percent between June 30 and Dec. 31, officials said. The earnings brought the fund's total value to about $250 billion from about $237 billion on June 30.

But while earnings rebounded in the first half of the fiscal year, they were still a little short of the 7.5 percent return CalPERS assumes for the entire fiscal year.

And the 13.3 percent earnings reported for the 2012 calendar year also fell short of the system's performance benchmark of 14.4 percent net returns in 2012, according to a Jan. 10 memo to CalPERS' investment committee.

Poorer-than-expected performance of the system's private equities investments in the 2012 calendar year – which missed CalPERS' benchmark for the investment category by 16.21 percent – contributed to the total fund's under-performance in 2012, the memo said.

CalPERS' 13.3 percent net gains on total investments during the 2012 calendar year reflected those of domestic and foreign markets. Between Jan. 3, 2012, and Dec. 31, 2012, the S& P 500 gained 11.68 percent, the Dow Jones Industrial Average gained 5.7 percent, and Nasdaq gained 14 percent, according to market data compiled by Bloomberg.

Returns on investments are important to CalPERS, because the system relies on investments to help taxpayers fill the retirement kitty. When investments under-perform – or fail to produce the 7.5 percent annualized rate of return CalPERS expects – taxpayers must contribute more to the pension fund so everything pencils out in the end.

And when taxpayers spend more money on pensions, there is less money to pay for public services such as police and public libraries.

Critics of the public pension system have long argued that CalPERS 7.5-percent assumed rate of return is too optimistic, and that pie-in-the-sky expectations keep taxpayers' bills artificially low, obscuring the true cost of benefits.

In July, Moody's Investors Service, one the nation's leading credit rating firms, released a request for comment on its proposal to adjust how public pension systems report liability and cost. Among the key proposals was that pension systems adjust their assumed rate of return to 5.5 percent – a rate of return that is more in line with recent market performance.

“Investment return assumptions in use by public plans today are inconsistent with actual return experience over the past decade (when total returns on the S& P 500 index grew at about 4.1 percent annually) and today's low fixed-income yield environment,” the report said.

Lowering the assumed rate of return to the proposed 5.5 percent would create a more realistic picture of what pension costs still need to be covered by worker and taxpayer contributions, the report said.

That adjustment was among several Moody's proposed as part of an effort to make analysis of pension liability more transparent and consistent, the report said. More transparent and consistent reporting would allow Moody's to improve its analysis of pension systems' debt.

Last year, CalPERS reduced its assumed rate of return to 7.5 percent from 7.75 percent, a number the system had been using for the previous decade.

CalPERS officials said the system's investments had earned about 7 percent over the long haul. As a long-term investor, CalPERS measures returns over decades, not performance during a single year.

Still, a few years of smaller-than expected returns on investments have hurt the retirement system's overall health, according to CalPERS' Comprehensive Annual Financial Report for the 2012 fiscal year.

The system's level of funding – or the percentage of promised benefits the fund has money to cover – fell to about 70 percent by June 30, CalPERS spokesman Brad Pacheco said after the report was released earlier this month.

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